Two mutually exclusive investment opportunities require an initial investment of $8 million Investment A then generates $1.70 million per year in perpetuity, while investment B pays $1.00 million in the first with cash flows increasing by 5% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent? OA. 13% OB. 12% OC. 6% OD. 3%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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**Investment Decision Problem:**
Two mutually exclusive investment opportunities require an initial investment of $8 million. Investment A generates $1.70 million per year in perpetuity, while Investment B pays $1.00 million in the first year, with cash flows increasing by 5% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent?

- **A.** 13%
- **B.** 12%
- **C.** 6%
- **D.** 3%
Transcribed Image Text:**Investment Decision Problem:** Two mutually exclusive investment opportunities require an initial investment of $8 million. Investment A generates $1.70 million per year in perpetuity, while Investment B pays $1.00 million in the first year, with cash flows increasing by 5% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent? - **A.** 13% - **B.** 12% - **C.** 6% - **D.** 3%
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